New to GIFT City? Start with What is GIFT City? For an overview of FCNR deposits, see FCNR deposit: rates, US tax and how it works. We have covered leveraged FCNR three times as the offers changed: June 2026, July 2026 and August 2026, through GIFT City.
The 15% "deposit" offered to NRIs in the summer of 2026 ran through GIFT City, the dollar financial zone India built in Gujarat. In June 2026, the Reserve Bank of India (RBI) agreed to absorb the currency hedging cost on fresh 3-to-5-year FCNR(B) deposits, the fixed-term dollar deposits non-resident Indians hold at Indian banks.
It then permitted banks to lend against those deposits through their GIFT City branches, with no ceiling on the leverage multiple (how many times your own money the bank will lend you). Most domestic banks were offering about 9 times the investor's capital. HSBC's GIFT City unit was offering up to 19.
This post covers the structure, the US tax question that can turn the advertised return negative, and the reason the product requires a GIFT City account.
The scheme that is opening the accounts
Your bank had a second, more immediate reason to want you in GIFT City in the summer of 2026, and it does not involve mutual funds. On June 8, the RBI announced a dollar-rupee swap facility under which it absorbs the full currency hedging cost on fresh 3-to-5-year FCNR(B) deposits.
Relieved of that cost, banks raised dollar deposit rates to 6% and higher. Ujjivan Small Finance Bank's 7.5% is the highest published rate in the program.
In late June, an RBI FAQ removed the last constraint. Indian banks and their overseas branches, explicitly including their GIFT City units, may lend against FCNR(B) deposits raised under the scheme, and the RBI set no ceiling on the leverage multiple.
The consequence became clear within weeks. A single bank can now run both sides of the transaction. It accepts your FCNR deposit on the Indian side and extends a loan against it through its GIFT City branch. That branch is treated as a foreign branch and does not operate under the domestic rulebook.
The loan proceeds fund further deposits, and those deposits secure further loans, so the return on the investor's own capital rises with each turn of leverage. Most large domestic banks have offered about 9 times the investor's capital. HSBC, through its GIFT City unit, was offering up to 19 times.
The sales presentation rests on this arithmetic. At a 6.5% deposit rate and a one-point difference between the deposit rate and the loan rate, 9 times leverage produces roughly 15.5% on capital. The marketing materials generally end at that figure.
Why a GIFT City account appears in the paperwork
This structure is the reason a GIFT City account appears in the paperwork. The loan is booked at the banking unit, and taking the loan requires becoming a customer of that unit. Three points deserve attention before you sign anything.
- The return is a spread trade, and the spread (the gap between the deposit rate and the loan rate) is fixed at the outset. The risk in this product is that the economics are set narrow on day one, and the leverage magnifies every cost, fees included. Rates moving against you later is not the risk, because both rates are fixed.
- This is a personal loan obligation secured by your deposits. It is not a deposit.
- Consider why the program exists. The rupee spent mid-July 2026 within one percent of its record low, and NRI dollar deposits are among the most reliable foreign capital India can raise. The RBI designed this facility to attract dollar funding at a difficult moment for the currency. It did not design it to improve the return on your savings.
The US tax question: net interest or gross interest
The largest unknown is US tax treatment, and it is the one most capable of turning the advertised return negative. The product works economically only if you are taxed on the spread, the difference between the deposit interest and the loan interest.
Reporting on that net basis is a defensible position where each loan is cleanly documented against each deposit, but it is not settled. The alternative reading is severe. Under it, the full deposit interest is taxable as ordinary income, while the loan interest is an investment interest expense, deductible only by filers who itemize and only against net investment income.
Consider the exposure at 9 times leverage and a 6.5% deposit rate. The gross interest subject to that reading is on the order of 60% of your capital each year. A 37% federal rate applied to that figure exceeds the entire 15.5% spread the product advertises. The same structure, under two readings of the same tax code, produces either a mid-teens return or a loss.
Your state return: New Jersey and California
The state return needs separate scrutiny, because state rules do not automatically follow the federal treatment. The two states where NRI professionals are most concentrated show the range.
New Jersey is the harsher case. The state's gross income tax permits only a short list of specific deductions. Federal itemized deductions do not carry over, and investment interest is not on the list. A New Jersey filer is therefore taxed on the full deposit interest with no offset for the loan interest. That treatment can erase the spread on its own, whatever the federal return allows.
California allows the deduction, calculated on its Form 3526, but only for filers who itemize on the California return. At marginal rates that reach 13.3%, even the favorable outcome gives up a meaningful share of a spread this thin. The state you file in changes the arithmetic of this product.
Compliance guardrail: the account is reportable
A GIFT City account is a foreign financial account. That covers the banking-unit account itself, any dollar deposit inside it, and the leveraged FCNR structure booked through it.
If it pushes the aggregate maximum value of your foreign accounts above $10,000 at any point in the year, it must be reported on the FBAR (FinCEN Form 114, the US report of foreign bank accounts), and likely on Form 8938 as well. Both are measured on the gross leveraged deposit, not your equity. The FBAR deadline post explains when the form is due.
Interest the banking unit pays a non-resident is exempt from Indian tax, so no foreign tax credit arises to offset the US tax on that same interest. The reporting attaches from the first dollar. India grants the exemption, and it does not carry over to your US return.
The order of steps if you have received this offer
The points above fall into a sequence. Work through it before any money moves.
- Get the deposit rate, the locked loan rate and the all-in fees from the bank in writing.
- Work out the spread after fees, and remember that the fees are multiplied by the leverage along with everything else.
- Ask a cross-border tax professional how the deposit interest and the loan interest will be treated on your federal return.
- Ask the same question for your state return, because the state answer can differ from the federal one.
- Plan the FBAR and Form 8938 reporting on the gross leveraged deposit.
- Read the loan documents as a borrower, because that is what you will be.
Playbook Move: If you have received this offer, request two figures in writing before anything else: the locked loan rate and the all-in fees, both stated against the deposit rate. The economics of the entire product sit inside that spread. Then put one question to a cross-border tax professional before signing. Ask how the deposit interest and the loan interest will be treated on your federal return and on your state return. If the answers do not support net treatment in both places, the after-tax return is not the number in the presentation. If the bank will not provide the spread in writing, decline.
From Edition 10 of the NRI Playbook newsletter. For informational purposes only; not financial, tax, or legal advice. For decisions about your specific situation, consult a qualified cross-border tax professional.